Thursday, June 21, 2012

Google's newest H.264 royalty demand is still hundreds of times the pool rate

Major news agencies (Bloomberg, Dow Jones, Reuters) report on a "settlement offer" that Google subsidiary Motorola Mobility made Microsoft, and Microsoft's response, describing this as "little more than an effort to change the subject" at time when antitrust authorities are increasingly concerned over standard-essential patents (SEP) abuse.

I'll get to the numbers involved in a moment, but the very first indication that Google (Motorola) didn't really mean this offer to be acceptable is that the offers parties make during the course of real settlement talks are held confidential and not shared with news agencies on the record. All that gets announced at the end of real settlement talks is that there is a deal, and the most that will be said about the terms is an indication as to which party ends up the net payer, without staying dollar/cent amounts. The Apple-Nokia settlement is a representative example.

The only reason why someone would make such an offer public is to play a perception game in the political arena. In this case, obvious motivations would be to influence decisions (such as by discouraging regulators from taking forceful action) and, possibly, to set the stage for aggressive measures such as new court filings or enforcement initiatives.

Motorola's vice president of intellectual property, Kirk Dailey, is quoted as saying that "[i]njunctions are an extreme remedy, but not when you've been negotiating with someone for years with no movement, and who is actively seeking to destroy a competitor ecosystem". It's hard to see what he means by the last part: with more than 70% of the Android market (including all major players except for Motorola) having accepted Microsoft's licensing terms, there are no signs of destruction. Interestingly, even Motorola now offers to pay something -- by far not enough, but something -- to Microsoft for each Android device it sells.

Let's talk some more about the first part, which is that SEP injunctions should be acceptable "when you've been negotiating with someone for years with no movement". For a long time Motorola has been claiming in court that its original royalty demand of 2.25% of the price of the end product (an entire PC, not just a Windows license) "was in fact reasonable RAND". The most recent filing in which I saw this position reflected was Motorola's petition for review of Judge Shaw's findings, just a few weeks ago. And now, all of a sudden, Motorola goes down to a per-unit royalty of 50 cents for each copy of Windows, while still demanding 2.25% of the price of an Xbox. If the original 2.25%-of-price-of-PC logic still applied, the 50 cent demand for each copy of Windows would correspond to the assumption that the average PC sells at $22.22. When Microsoft calculated its conservative estimate of a $4 billion annual royalty demand, it assumed an average PC price of $500, which I thought was still very low. But even from that $500 assumption, Motorola has now gone down by a factor of 22.5. If 22.5 times the current demand "was in fact reasonable RAND" only a few weeks or months ago, what will "reasonable RAND" be in another few weeks or months?

The thing is that Google would have to slash its demands by an even greater factor next time in order to make a settlement possible. A decision by the Mannheim Regional Court explains Microsoft's analysis of what Motorola would be entitled to for a license to its H.264 patents. Microsoft said that 270 patent families have been declared essential to H.264, belonging to 36 different patent holders. Based on the number of patent families held, Motorola's 17 patent families represent 6.3% of all H.264 SEPs, while the MPEG LA H.264 pool contains 63.6% of them (171 patent families held by 28 companies) and third parties (such as AT&T and Nokia) hold 30.1% of those patent families. Based on the number of patent families, Motorola's portfolio is the fifth-largest one, but based on a citation analysis (statistical analysis based on how frequently patents are referenced by other patents), it would only rank 11th (while the share of the MPEG LA pool actually goes up to 72.5% on this basis).

On a per-patent-family basis, the maximum per-unit royalty that an MPEG LA patent holder can receive amounts to approximately one hundredth of a (U.S.) cent. Even that assumption is unrealistically high since the MPEG LA pool rate goes down with volume and has a cap, while this number is based on the maximum per-unit rate (it's based on what a licensee pays for the 100,000th to 5,000,000th unit of a licensed product; there is no fee below 100,000, and it goes down after 5,000,000, ultimately converging with zero). On that basis, Motorola's 17 H.264 patent families would result in a per-unit royalty of well below 2 (U.S.) cents. But even compared to 2 cents, Motorola is now asking for 25 times that number -- and again, this is based on the maximum per-unit rate under MPEG LA's terms, but the more realistic approach would be the average rate, which is far lower. Just based on the number of patent families (which is more favorable to Motorola than the citation approach), Motorola would be entitled to approximately 10% of the pool rate. Since the pool rate is capped at $6.5 million per year, we're talking about $650,000 on that basis, while Motorola itself says that Microsoft would have to pay, if it accepted its "settlement offer", $150 million if it sells 300 million copies of Windows. We're still talking about a difference between Google's (Motorola's) demand and the MPEG LA pool rate that corresponds to a triple-digit factor.

That's the luxury you can afford if you ask for the moon: you can slash your demand by a factor of 20-25 and still be hundreds of times above the actual market level.

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About Me

Florian Mueller is a former award-winning intellectual property activist with 25 years of software industry expertise spanning across different market segments (games, education, productivity and infrastructure software), diverse business models and a variety of technical and commercial areas of responsibility. In recent years, Florian advised a diversity of clients on the patent wars surrounding mobile devices, and on their economic and technical implications. (In order to avoid conflicts of interest, Florian does not hold or initiate transactions in any technology stocks or derivatives thereof.) He is now developing a game app for smartphones and tablet computers.